Kevin Warsh’s stripped-back Fed communication ‘already backfiring’, say investors

{"text":[[{"start":7.8,"text":"Federal Reserve chair Kevin Warsh’s stripped-back approach to communication is “already backfiring” and risks eroding the central bank’s influence over the $31tn US Treasury market, investors have warned."}],[{"start":20.021,"text":"Thirty-year US borrowing costs jumped to their highest since 2007 on Thursday, despite the Fed holding its policy rates steady."}],[{"start":26.56,"text":"Warsh vowed at Wednesday’s post-decision press conference that the central bank “will not waver” in the battle against inflation. But investors said the lack of forward guidance on where rates are going — and the lack of an explanation as to why the Fed had not raised them if inflation is a concern — had spooked the market."}],[{"start":44.08,"text":"“Whether by intent or accident, he has let go of any air of control over the Treasury market,” said Stephen Jones, chief investment officer at Aegon Asset Management. “That’s quite a change from the desires and modus operandi of Fed chairs in the past.”"}],[{"start":58.08,"text":"Warsh’s remarks prompted a sharp steepening in the Treasury yield curve, as traders demanded more to lend to the US government over the longer term on fears of rising inflation. This simultaneously pushed short-term yields lower as traders cut their bets on near-term rate rises."}],[{"start":74.44,"text":"The 30-year yield rose as high as 5.24 per cent on Thursday, up from about 5.12 per cent before Wednesday’s announcement. The two-year yield was about 4.24 per cent, down from 4.34 per cent before the decision."}],[{"start":null,"text":"

"}],[{"start":88.84,"text":"The rise in long-term borrowing costs will intensify the pressure on the US public finances and on companies, while also tightening conditions for households by driving up the interest rate on popular 30-year mortgages."}],[{"start":101.44,"text":"“Warsh’s no-guidance approach is already backfiring,” said Francesco Pesole, a strategist at ING, adding that the steepening in the Treasury curve after Wednesday’s press conference “looked very much like a loss-of-confidence trade”."}],[{"start":114.92,"text":"The gap between 30-year and two-year US Treasuries jumped from about 0.8 percentage points to 0.97 percentage points, its sharpest move in almost a year."}],[{"start":126.1,"text":"There was an unusually large split in market bets running into the meeting, as investors struggled to decipher how the new Fed chair would respond to a fresh surge in oil prices and the central bank’s preferred measure of US inflation running at 4.1 per cent ahead of the meeting, against its 2 per cent target. Traders had put a roughly 30 per cent chance on a rate increase ahead of the meeting, according to levels implied by derivatives markets."}],[{"start":null,"text":""}],[{"start":151.8,"text":"Warsh acknowledged on Wednesday that his tight-lipped approach could have been a factor in interest rate pricing since the last Fed meeting in June, but added that this was “a change for the better” and the central bank was “just getting started” with its new communications strategy."}],[{"start":166.84,"text":"He argued that a rise in bond yields, which affect US businesses and households, since the last meeting had already essentially tightened monetary policy without the Fed having to officially raise borrowing costs. That left investors with the impression that the Fed was happier to let the market do the work for it, without having to raise policy rates."}],[{"start":185.82,"text":"Some investors said this was enough of an explanation as to why the Fed had not raised rates to combat the threat of inflation."}],[{"start":192.64,"text":"“I was scratching my head, but during that press conference he explained that market conditions have tightened,” said Robert Tipp, head of global bonds at PGIM. The rise in yields “is what [Fed officials] want”, he said, but added “it may not be a painless increase”."}],[{"start":208.28,"text":"Warsh also said he understood “the desire for rolling forecasts and commentary” from the Fed’s rate-setting committee, three of whom dissented and voted for a rate rise. “But for our part, we need to observe market reaction to developments, direct and unfiltered.”"}],[{"start":223.76,"text":"Investor frustration over Warsh’s lack of guidance adds to pressure on Fed officials to convince markets they remain committed to bringing inflation back on track ahead of a crucial vote in mid-September."}],[{"start":234.4,"text":"Warsh’s next high-profile speech is set to come at the Kansas City Fed’s Jackson Hole conference in late August. On Wednesday, the Fed chair said those remarks were still “a blank piece of paper right now”."}],[{"start":247.44,"text":"Traders are pricing in an almost two-thirds chance that the Fed raises borrowing costs by a quarter point at its next vote, according to levels implied by futures contracts."}],[{"start":259.16,"text":"Ludovic Subran, chief investment officer at Germany’s Allianz, said the Fed press conference format “doesn’t work in its current form” and was “a forward-guidance instrument that now pretends not to be one”."}],[{"start":271.84,"text":"But investors said the reaction in bond markets vindicated widespread warnings that the Fed’s decision to axe forward guidance would spark volatility and drive up borrowing costs."}],[{"start":282.1,"text":"“The lesson is really what we already knew — monetary policy transmission is more orderly when central banks communicate more clearly,” said Mike Riddell, a fund manager at Fidelity International. “Deliberately communicating less means more market volatility and uncertainty.”"}],[{"start":300.36,"text":"Additional reporting by Emily Herbert in London and Claire Jones in Washington"}],[{"start":310.32,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1785469137_9856.mp3"}